11 March 2010

Saving Adam Smith

When I arrived at University with solid left wing familial credentials to my name, my first reaction on hearing that Adam Smith would be an integral part of my first year politics studies was one of repugnance. Was Smith not the godfather of Thatcherism? Was Smith’s theories not adopted by the neo-liberalists to wreak untold havoc on my home town and the British Working class in general? Indeed Margaret Thatcher’s favourite think tank took Smith’s name- the Adam Smith Institute. To someone of my background who had experienced the wholescale socio-economic demolition of his hometown, the name of Adam Smith was synonymous with all that I detested about Thatcherism, Reaganomics and supply side economics. Indeed does Adam Smith not appear on that great symbol of Government subjection to big business, the £20 Bank of England note?

However, as I studied both Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations and Theory of moral sentiments I began to come to the opinion that not only was Smith erroneously adopted as the godfather of right wing neo-liberalism but was wholly undeserving of left wing vilification as a right wing demagogue. From even the most basic reading of both wealth of nations and moral sentiments it becomes clear that Smith, far from promoting the neo-liberal consensus which corrodes the very fabric of our society; would in fact be horrified at the neo-liberal experiment and it’s socio-economic consequences. In this sense it is important that Smith be rescued from both his neo-liberal hijacking and from left wing ire.

I profess to being neither an economist nor an economic expert but if this piece goes some way to dispelling some of the popular preconceptions of Adam Smith as the neo-liberal father of contemporary Capitalist society then I will consider this piece to have done its job.

"Neo-Liberalism" means we are talking about a new kind of liberalism. So what was the old kind? The liberal school of economics became famous in Europe when Adam Smith, a Scottish economist, published a book in 1776 called The Wealth of Nations. He and others advocated the abolition of government intervention in economic matters. No restrictions on manufacturing, no barriers to commerce, no tariffs, he said; free trade was the best way for a nation's economy to develop. Such ideas were "liberal" in the sense of no controls. This application of individualism encouraged "free" enterprise," "free" competition -- which came to mean, free for the capitalists to make huge profits as they wished." - Elizabeth Martinez, left wing activist and feminist.

This wholly erroneous left wing interpretation of Adam Smith is borne out of his adoption by the Chicago school in the 1950’s as well as Thatcher and Reagan as the prophet of free trade, unrestrained capitalism and laissez faire Government. If we accept this view at face value, it is not difficult to make the logical leap between Smith's writings and the appalling exploitation of men, women and children from the earliest period of the Industrial Revolution to the vast socio-economic inequalities being wreaked by today’s neo-liberals across both the developed and the developing world. However, is this a gross misinterpretation of Smith’s theories and analysis of Political economy?

The wealth of nations written in 1776, was based on Smith’s perception that the 50 miles between the Clyde and the Forth was an International market with the port of Glasgow importing sugar and tobacco which was then sold on to England and Europe. Whilst local industry produced cloth, pottery and hardware, Highlanders drove cattle into the Forth/Clyde plain to sell and fishermen landed their catches. Smith’s observations of the economic forces at work in this International market led to his account that in comparison with the three previous epochs of economic history- the age of Hunting, the age of Sheperding and the age of Agriculture, (Smith’s lectures on jurisprudence) the contemporary epoch- Commerce was creating more wealth and being of greater benefit to Society than any of the previous three epochs. The wealth of nations was an investigation into the processes involved in this new age of commerce and Smith’s views on how all society could benefit as a result.

Much of the misinterpretation of Smith’s economic theories come from misreadings of his famous ‘’invisible hand’’ passage:

“Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” (Book IV)

Conservative and neo-liberal thinkers adopted the ‘’invisible hand’’ passage wholesale as the model for the elimination of tax and spend Government, unrestrained and unregulated free market activity and laissez faire Government, arguing that the benefits of unrestrained markets will trickle down to the lower echelons of society. The "invisible hand" clearly shows that pursuing private interest unwittingly or not, benefits all of society and so all business and individuals should be free of Government fetters in order to enrich themselves with the added benefit that as a result it enriches the rest of society. This is the basic model of supply side economics, Thatcherism and Reaganomics.

But is this the central economic and social theory theory that Smith espoused? The famous ‘’invisible hand’’ passage arrives at a time when Smith argues that markets can raise productivity and promote economic growth and that how in certain circumstances private pursuit can unwittingly create economic benefits for others. It is the only time in the entire book that Smith makes mention of ‘’the invisible hand.’’

What the neo-liberals either unwittingly or purposely fail to address is that Smith spends several chapters in the wealth of nations critiquing the private interests of businessmen. In several chapters Smith makes clear that left alone to do what they want, businessmen and companies form monopolies, cartels, powerful lobbyists and can easily undermine the public interest:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary"- (Book I)

Additionally, Smith makes clear that businessmen:

’’ generally have an interest to deceive and even oppress the public and who accordingly have, upon many occasions, both deceived and oppressed it’’ (Book I, Ch XI)

Tellingly, on the subject of taxes, Smith’s view that:

"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state."

is completely at odds with the tax avoidance/tax evasion practices carried out by most Big Business interests in today’s neo-liberal environment. Smith makes clear that it is a moral duty to contribute in taxes in proportion to what you receive from trading and pursuing your economic interests in the nation state. This is anathema to the neo-liberal agenda of concentrating wealth and removing it from the country of origin into tax havens.

Indeed, Smith next underlines the concept of progressive taxation as a desirable pursuit for Government to help the poor in Book V:

"The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."

Again, totally at odds with the low taxation agenda of neo-liberalism and showing great awareness of the plight of the ordinary person in the Commerce age.

In Smith’s view, only a well run and ordered Government and Polity can curb the worst excesses of business interests whilst ensuring economic growth can be of benefit to all of society.

But what of the ordinary worker, where do they fit in, in the grand scheme of "Commerce"? Smith whilst admiring the "division of labour" in which most "common people" were involved in, was also aware of the alienation that repetitive actions involved in specialisation can create. Whilst division of labour creates greater production and wealth, it also creates alienation-

"their labour is both so constant and so severe, that it leaves them little leisure and less inclination to apply to, or even think of anything else" (Book I, ChV

Smith argues that an economic system that would stunt the minds of its workers is morally unacceptable. Inherent in this theory is that the modern tendency to create economic models without regard to their moral defensibility (eg the first great neo-liberal experiment of Pinochet’s Chile) would be repugnant to Smith.

Smith believes the cure for alienation is publicly funded education and that an educated nation is the most efficient and well governed. Smith’s solution to the worst effects of alienation can be construed as paternalistic and simplistic, however when comparing his arguments in favour of education for the workers with the conditions of the working classes at the height of the Industrial Revolution, it is clear that the so called "godfather of capitalism" is distinctly out of synch with the ethos he was supposed to have created. The ethos of the ‘undeserving poor’ found no truck with Smith as he constantly argues in favour of intervention to improve the conditions for the workers.

So what is the central message of Adam Smith? Smith believed that whilst the "Age of Commerce" was the most beneficial to contemporary society in comparison with previous epochs, he believed at the same time that society should be for the benefit of all and not the few:

"what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable."(Book I Chapter VIII)

I hope to have argued that Smith would have found the living and working conditions of millions during the Industrial Revolution in the name of free trade Capitalism abhorrent. Additionally, his concepts of progressive taxation, interventionist Government to curb the selfish excesses of the businessman and to promote Commerce for the good of all society, are completely at odds with the socio-economic mantra espoused by those neo-liberal dogmatists who would take Smith’s name in vain. I also hope that I have argued that Smith is undeserving of the left wing ire that is directed at him.

I finish with a quote of Smith’s which proves incredibly prescient in the light of contemporary neo-liberal society’s love and worship of the rich whilst at the same time its detestation of the poor:

"This disposition to admire, and almost to worship, the rich and powerful, and to despise, or, at least neglect persons of poor and mean conditions, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments."(Theory of Moral Sentiments)

It is right and good that Adam Smith should be rescued from the neo-liberals.

27 comments:

I enjoyed this and it's something of a revelation for me. I haven't read any Adam Smith and just assumed the left wing ire hurled at him was true - bolstered by the fact that the AS Institute is the baby of the right and the way he is constantly trotted out by all and sundry as the father of capitalist thought.

Will be interested in following any conversations on here from people who know more about this than I do.

well, I'm no economist neither (the degree thing is purely a formality *cough*), possibly proved by me not realising Smith was writing that long ago, but I had tripped over some of the passages before, and did blithely wonder whether"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities..."was some sort of precursor to "from each according to his ability..."

Did he have anything to say about the second part? Now I've got him placed in history properly, a belief in state-funded education for all would appear to have categorised him then as a right radical...

Damnit, am going to have to read some of this stuff now, aren't I? And I was doing so well not adding to the 'to read' shelf.

I "did" Smith briefly at A level (which was in 2002, so doing Smith meant spelling his name right etc). But found him very interesting, particularly his "cannons of taxation" and various tax theories.

The most crucial part for me is:

"In several chapters Smith makes clear that left alone to do what they want, businessmen and companies form monopolies, cartels, powerful lobbyists and can easily undermine the public interest"

This infuriates me so much because neoliberalism, which prides itself on its pure, untainted economic theory, actually ignores some of the most fundamental economic theories with regard to the above.

"Survival of the fittest"/efficiency through competition - the ultimate result of which can only be monopoly. Take-overs are far too easily waved in, markets are increasingly hoarded into the hands of a couple of firms and time and time again the consumer is shafted - this will always be the result, the "fit" firms buy up the "weak" firms. Left "free", markets will always tend to monopoly.

Cartels and oligopolies - take the banks, a handful of firms, a market allowed to be hoarded by takeovers. When the banks threatened they would have to up fees to cover any profits lost through not being able to charge fees hugely above the associated costs, this was black and white evidence of an uncompetitive market (according to the economic theories that neoliberals claims to adhere to). Yet they didnt break the market up, they actively consolidated it during the bank crisis with the HBOS takeover.

Classic economic theory - the sin of monopoly. Neoliberals dont just ignore this, they *actively* ignore it by bringing private firms in to run natural monopolies, like rail. The claim that the regulator will do the job of a competitor is madness (even ignoring the "regulatory capture" that is so evident).

They are propped up with colossal public subsidies and then a regulator to supposedly dictate price - so all round huge "market distortions" have to be imposed to make the neoliberal model "work" - which of course it doesnt. So we have train fares doubling and subsidy rising 4 fold.

Neoliberalism is really pseudo-theory, its intellectually dishonest, pragmatic wealth hording dressed up in a collection of self contradictory, and basic, economic theories.

Very good indeed. Long time since I read Smith (again A levels, but 13 long years before Jay.I think what the hijackers forget and this is not uncommon, is that you alwyas,but always,have to take into account the context of the times,social norms and assumptions of the period in which Smith wrote.Morality and civic virtue were so ingrained (aye,yes with much hypocrisy too) that it was taken as read that anyone respectable or with a functioning intelligence would have a sense of civic duty.The purpose of markets as being the most efficient way of meeting societal needs, but never imperilling society or the civic fabric.The Chicago school deliberately gloss over this, even somehow overlooking the occasions when Smith makes it explicit, then brazenly attribute bogus 'purity' to their unfettered market fixations.

Alisdairyou always, but always, have to take into account the context of the times, social norms and assumptions of the period in which Smith wroteIndeed, and as I said above, I hadn't realised he was writing mid 18thC (am crap with names, had assumed he was early 20thC...). So, having found that out, I'm actually surprised by his 'social radicalism' - am hotter on history than economics, for sure, but that period was one where "rich man in his castle, poor man at his gate" was the orthodox view.

A more sympathetic view of the working poor was more prevalent in non-conformism - the Quaker outfits in the midlands and elsewhere, New Lanark, etc - "this close association between Industry and Dissent" - and the 'dissenter bosses' were largely themselves excluded from the mainstream polity (not sure if they could stand as MPs, couldn't marry in their own chapels, difficulties getting into a state administration role etc). Their 'political' engagement was therefore largely through their own actions, so in the field of industrial relations at their own plants, rather than 'policy'.

Smith's views as set out above sound more to me like the 'dissenting' opinion - while later 'disciples' may have made certain assumptions in translating his words (sometimes mis-translating) to the modern age, the assumption I'd make is that were Smith to have operated in the modern age, his writings would have been on the 'lefter' edge of now, as they seem to have been on the 'lefter' edge of then.

regarding Smith's attitude to education. In the Scottish context of the time it wasn't as radical an idea as first assumed.

Scotland had a long history of Church of Scotland parish schools teaching the population to read and write. Not for purely social betterment but so that each person could read the bible and have their own dialogue with God in line with the Church of Scotland's teachings.

Tom Devine in his "The Socttish Nation" states that in 1800, 65% of all men in Scotland (Women as ever were a different matter although he suggests about 40% literacy) were literate compared to 9% in England. This is a major reasons why Scots were at the forefront of Empire and invention. So to Smith in the late 1700's, the provision of Education was not as radical a belief as it would have been in England.

Jay, you nail it with your post above.

The "Smith as neo liberalist" camp use that one quote of the "invisible hand" completely out of context to the main arguments of the "Wealth of Nations. Indeed, the word "Capitalism" is never mentioned in any of Smith's works, it was a word that didn't come into common usage until the 1850's.

Smith was a deeply moral man who believed that "Commerce" should be for the good of all by promoting open competition but having checks in place to curb the rapacious selfishness of the businessman.

"Tom Devine in his "The Socttish Nation" states that in 1800, 65% of all men in Scotland (Women as ever were a different matter although he suggests about 40% literacy) were literate compared to 9% in England."Blimey - was wondering how come so many scientific breakthroughs of the era came from Scots...

from my readings and analysis of Smith, what you say is correct. Von Hayek, Greenspan, PJ O'Rourke, Friedman all emphasise the "invisible hand", that from unthinking self interest springs public good. Therefore the market should be able to dictate it's own processes, prices etc with no Government intervention.

Smith does make the "self interest as beneficial" assertion, but a greater part of the Wealth of Nations is taken up with the problem of business rapaciousness as a result of self interest and the role of a Government to curb this for the good of the people and the nation.

Wall Street Journal journalist and economist Herbert Stein, wrote a famous article: ''Adam Smith did not wear an Adam Smith necktie'', in which he made the point that although Smith argued in favour of a free market for the good of the people, Government had to make business people responsible.

Another quote from Smith in the Wealth of Nations:

“Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.”

makes it clear that Smith identified that the rich would always work against the poor.

The various Government curbs he advocates against business selfishness in addition to his plans for "common people", encapsulates a political economist who believed that free trade should work for the benefit of all.

Interesting. When I "did" Smith in Uni, it was in a history class, not economics, and was in the context of Englightenment thinkers followed by Locke, Bentham, etc. And yes, it was implied that he was a progressive thinker, and certainly not a conservative one.

Just wanted to say that this is a fantastic piece, really enjoyed it. I think that Smith also cautions - in Book V of Wealth of Nations - that the rise of markets is likely to cause a collapse of what he called 'martial virtue' which in modern parlance I suppose would be something like civic cohesion. And of course that is exactly what we have seen with the promotion of individualism by the neo-liberals. This was what Thatcher really didn't 'get'. She wanted to combine free markets with traditional morality but of course morality (traditional ot otherwise) is eroded by free markets. Thatcher the shopkeeper's daughter envisaged a world of thrifty, moralistic entrepreneurs set free of the state and I assume never expected that once you dusmantled regulatory controls then people would go on a hedonistic credit-fuelled binge. But if people are encouraged to be the individual utility-maximizers of neo-liberal theory then of course that is exactly what they are likely to do, and if that has bad consequences for other people then - tough luck. And I think that something like this is what Smith had in mind in his warning.

My other reaction was a memory that in Theory of Moral Sentiments he talks about the basis of morality as being the ability to empathise by imagining yourself in another person's situation. It strikes me over and over again on cif that the hate-filled comments about asylum seekers, IB claimants and so on are marked by a complete inability to do that - to have any imagination at all about what other people's lives are like. Someone like MaM, for example (but there are loads of others), strikes me as an entirely failed moral entity, almost a sociopath.

Wish I had time to write more but, anyway, spot on to reclaim Smith - though too late, I fear for the Adam Smith Institute to see the error of its ways - so cheers for that.

Nice to see you here, Peter. @PhilippaB, Smith's views weren't terribly unusual for the time in Scotland. Morality, even some Calvinist and Knoxian notions of civic responsibility/duty, Scottish Enlightenment ideas were very rapid in their spread (and cross-pollination)

thanks for the kind words. It means a lot coming from a poster I admire very much.

I also understand that you're very busy catching double agents for George Smiley so I appreciate you taking the time to comment ;)

"Sympathy" for your fellow man was, as you correctly outline, one of the central tenets of "moral sentiments". As well as sympathy for your countrymen, he also tackled the subject of slavery. As he wrote

"to reduce people into the vilest of all states, that of domestic slavery, and to sell them, man, woman, and child, like so many herds of cattle, to the highest bidder in the market."

This was a radical position to take considering typical attitudes of the time towards slavery and the wealth created on the back of it.

When Smith wrote "moral sentiments" he had the chair of moral philosophy at Glasgow University. Bearing in mind that Glasgow became exceptionally wealthy at this time on the back of slavery with the import of sugar and tobacco and also the trade in slaves, it was a remarkable stand to take.

Thanks for this, Duke: it contains a lesson that can't be repeated often enough: read things for yourself. I think I swallowed those criticisms whole too. Whether I can make myself read his work at this stage is another matter...

am heartily disgusted at the clearly anglo-centric base of my understanding of 18th C society...mea culpa...must stress this is as a result of doing my own research (book set in England) so my reading has been very partial...

martillo's point spot on.

do I recall that the last Gordon Brown thread included him lauding Smith? probably pretending to the more moral case as set out above, but in reality following the twisted version that now seems prevalent...

Duke this is a fascinating read. You really, really should submit this to Cif.

This paragraph you mention in one of your further comments: “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.” Is astounding! So radical really for the time, in fact, depressingly, it is radical for now.

I read a sentiment on Cif a few months ago - cannot remember who the poster was but he said that he felt we were well and truly stuffed because of neo liberalism. He said it was a true Frankensteins monster that we had created and one that was clearly destroying its creator (the Western economies) who were now pretty powerless to stop it. Very true I think.

Neoliberals nearly always just take the bits of theories that they want. The free marketeers on Cif seem to revel in their ignorance at times. They don't understand Marx at all (not that I am an expert) but they seem to have this belief that Marx hated capitalism whereas he saw it as a necessary step and did understand its dynamic power. Or that Keynesian methods are socialist whereas Keynes saw Marxist Socialism as 'illogical and dull'. They bandy the word socialism around for everything - which I think is a nasty little Americanism that seems to be sweeping British right wing thinking.

Very worrying times we live in, as the right seem so particularly aggressive and the left weak and in dissaray - or in the UK and the US pretty much non-existent.

I am going to read some Adam Smith now. This has made me want to understand him more. We only touched on him in my A-Level on political and economic history.

I agree with you from the analysis you have given that he seem very misunderstood.

A bit late to your excellent piece, Duke - sorry. I know little about economics, and to be honest, am not particularly interested in it as a subject/science per se. It was a damn good read though. (Note to Peter: selective rather than indiscriminate backslapping!)

A couple of questions - was the Chicago school not more a rejection of Keynsian economics than it was a (mis)appropration of Smith's philosophy? And what about Veblen? He always fascinated me (feminist economics?), and it seems that his legacy continues on a small scale with 'institutional economics'. He seems more relevant today than ever - perhaps the 'left', while reclaiming Adam Smith, could pick up on old Thorstein too.

Good article, your grace. You should certainly submit this to CiF. It might be worth reading Donald Winch's 'Adam Smith's Politics: An Essay in Historiographic Revision' first if you have not already done so, to see if there is anything you wish to change or add. Published IIRC in the mid-70's, it really started the backlash against the Smith-as-neoliberal distortion. An excerpt is available here: http://assets.cambridge.org/97805212/92887/excerpt/9780521292887_excerpt.pdf

In terms of more recent work Emma Rothschild's 'Economic Sentiments' is also worth looking at. There's a whole chapter on the 'invisible hand' concept and what Smith actually meant by the phrase / passage.

For the money-shot, however, there is a passage from Smith's 'Lectures on Jurisprudence' (he didn't actually see them through the press, they were cobbled together from contemporary students' notes) where he lists the 'disadvantages of a commercial spirit.' I'm at work at the moment so I can't look it up for you ATM, I'm afraid, but John Gray quotes it in 'Enlightenment's Wake.'